Twenty of the largest actively managed equity funds launched in China during the first quarter lost 35% of their AUM in the second quarter due to massive redemptions from investors, according to a report from Shanghai-based Z-Ben Advisors.
Three of the largest funds from E Fund Management and China Universal Asset Management, for example, lost $2.5bn of their original combined assets of $5.7bn, the report said.
Ivan Shi, director of data analytics at Z-Ben Advisors, explained that fund churning continues to be prevalent in the mainland.
“The huge redemption shows that the fund churning phenomenon is very obvious in China’s domestic market. It’s very common that once investors make money from a fund, distribution channels will advise them to buy a new fund as the channels want to earn more commissions,” Shi told FSA.
He added that new mutual fund investors have also treated mutual funds as stocks.
“New investors in the mutual fund industry also need education. Irrational investors who also lack mutual fund knowledge may regard that a fund’s net asset value (NAV) as a stock price, thinking that an increasing NAV will eventually drop just like stock price,” he said.
Fund churning has also been compounded by the greater prevalence of online distributors, which, in turn, has brought new demand into the mutual fund industry, according to the report.
“The speed at which such demand has materialised has left little time for investor education, leading to equity-like trading of funds. With strong fundraising looking set to continue through 3Q20, managers should be prepared for more of the same,” the report said.
Echoing Shi, Chloe Qu, Shenzhen-based manager research analyst at Morningstar, previously noted that although China’s fund industry continues to see blockbuster new fund launches, the overall industry’s total AUM did not grow much since April, as many investors were redeeming their shares from existing holdings to purchase new fund products.
Data from Morningstar shows that during the second quarter, 101 equity products were launched and collectively attracted RMB 74bn ($10.6bn) during their IPO period. However, despite the massive inflows toward these new funds, the total AUM for all equity funds sold in China increased only by 3% to RMB 1.54trn in June from RMB 1.49bn in April.
Separately, the Z-Ben report noted that investors in the mainland have switched from money market funds into actively managed equity products. Money market funds saw sizable net outflows of $95bn during the second quarter, while equity funds had net inflows of $34bn. However, these net inflows were concentrated in new products, the report said.
“The switch is mainly driven by the bullish A-share market in June and July,” Shi said.